I am Project Director for Economics at American Principles Project, a public policy organization with initiatives on monetary policy and public pension reform. I write frequently for newspapers and magazines and my work has been published in the Washington Post and Investors Business Daily among others.

Recreating A Real Gold Standard

Finished off as it was by the callous executive order of a U.S. president, the gold standard cannot be resurrected the same way. As the political system inches back toward gold-backed money, a roadmap for getting there is essential.

This is exactly what Lewis E. Lehrman (with whom this writer is professionally associated via American Principles Project and the Lehrman Institute) has provided with The True Gold Standard: A Monetary Reform Plan Without Official Reserve Currencies. Steeped in the experience of Jacques Rueff’s handling of postwar France’s return to the gold standard and Lehrman’s own thinking as a public intellectual, it is a comprehensive yet straightforward plan for cleaning up the global financial system.

As the subtitle suggests, the plan is based on replacing national currencies (the dollar, euro, yen) with the non-national, neutral asset of gold as the world’s reserve money supply. Nations would settle international payment deficits and surpluses in gold rather than paper-based currencies. This would have the effect, principally on the U.S. as the issuer of two-thirds of world reserves, of removing the debt overhang which has made trade deficits, government overborrowing, and hot money bubbles the way of life. Depending on whom you asked, the dollar standard was an “exorbitant privilege” (French president Valery Giscard d’Estaing) or an upgrade (Citibank financier Walter Wriston). Decades of financial disorder have now made it clear that it is actually an “insupportable burden” as Lehrman puts it.

Lehrman’s historical model is the international gold standard of 1873-1914, an era of industrial breakthrough, global economic growth, and astounding price stability. As charted by his colleague John Muller, it was the most stable period of U.S. monetary regimes based on the Consumer Price Index. Even with price shocks due to technological changes and rapid globalization, prices in the short-term and long-run were more stable than at any other time in American history. This was because of the credibility of the link between the dollar and gold, both for citizens at home and governments abroad.

How do we redevelop this best practice for the 21st century? In some ways, it will be less difficult with the integration of gold into the financial system already through electronic payment systems. On a practical level, using gold as money has never been easier (though financial repression of gold through taxes and regulation still presents a formidable barrier).

On the other hand, the proliferation of credit through new instruments and disintermediation has made the financial system more disorderly than ever. A major portion of credit creation today has been taken over by the shadow banking system, the recipient of the Federal Reserve’s bailouts. In addition to a system of unrestricted convertibility between the dollar and gold, Lehrman also outlines banking reform which would insist that financial institutions reestablish their role as fiduciaries through improved liquidity standards using fair market valuation and quarterly stress tests.

And what about the Fed? It does not, as Ron Paul demands, need to be ended as a prerequisite of sound money. But it must be reined in, to which Lehrman has also put much thinking. He mandates particular changes for the central bank, starting with a cease in open market operations.

The Fed would use the discount rate rather than the federal funds market to supply or withdraw credit in response to any imbalance between supply and demand for it. Commercial bills, not government securities, would be discounted and the Fed, like other central banks, would be prohibited from owning sovereign debt (other than short-term revenue anticipation bonds). The asset side of the ledger would consist of gold and liquid, secure non-governmental financial claims. Lehrman calls this Fed policy “scaled to the modest wit of man . . .” and it is a thorough relief from the excess allowed to the central bank today.

The heart of the gold standard has always been the idea of an external, impersonal and automatic discipline on the temptation to manipulate money. The gold standard links the supply of money with its natural demand. It inflation-proofs the central bank and takes away the government’s usage of continual deficit financing. It prevents nations from using their own debt to pay for imports and pushes trade relationships into balance. None of this is panacea for the disruptions of capitalism, but they do encourage the kind of free and fair capitalism we say we want. No one has given more of himself to rebuilding a monetary system worthy of that than Lewis Lehrman, and now he’s showing us how to get from here to there.

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